Senior Bank Loan

Senior bank loans — also called leveraged loans, syndicated loans or senior secured loans — are arranged by banks for typically sub-investment-grade borrowers, often private equity-backed companies. They include revolving credit facilities and term loans; term loan B tranches are sold mainly to institutional investors such as CLOs, loan funds and credit hedge funds. Interest is floating, set at a reference rate (now typically SOFR) plus a credit spread, often with a floor. The loan is governed by a credit agreement, and an administrative agent manages payments, notices and lender records.

Loans trade over the counter under LSTA (US) or LMA (Europe) standard documentation. They are generally not treated as securities, and settlement is an assignment process that often runs well beyond the market’s target timeline, with delayed compensation paid to the buyer when settlement is late.

How funds account for senior loans. Positions are recorded by facility and by rate contract, since each interest period can carry its own rate. Operations must accrue interest per contract, process rate resets, scheduled amortization, prepayments, commitment and ticking fees on unfunded amounts, PIK interest, OID amortization, and draws and repayments on revolvers. Broadly syndicated loans are usually priced by loan pricing services (Level 2); private and middle-market loans are valued with models or by third-party valuation agents (Level 3). Positions and cash are reconciled to agent notices and statements.

Pitfalls. The most common errors are missed agent notices (so rate resets, paydowns or amendments are booked late), unfunded commitments left out of exposure and liquidity reporting, accrued interest mishandled on secondary purchases, and failing to place defaulted loans on non-accrual. Amendments, extensions and restructurings need careful booking so that the loan’s cost, rate and maturity in the books match the credit agreement.

Example

A fund holds USD 3M of a term loan priced at SOFR + 3.75% with a 0.50% floor. At a quarterly reset with three-month SOFR at 4.20%, the all-in rate becomes 7.95%, and the fund accrues about USD 60,300 of interest over a 91-day period (3M × 7.95% × 91/360).